Equity Dynamics

September 24, 2013

Equity small.pngEquity is the difference in what your home is worth and what you owe. Ideally, as the value goes up and the unpaid balance goes down with each amortized payment made, the equity grows from two directions.

This dynamic leads to increasing a person’s net worth much faster than many other investments.

A homeowner has minimal control over value. It is necessary to maintain the property to avoid depreciation and make good decisions on capital improvements. After that, appreciation is generally controlled by supply and demand and the economy.

Mortgage management is something that the homeowner does have control. Making the decision to select a shorter term mortgage at a lower interest rate can have an impact on equity build-up. Lower interest rates amortize faster than higher interest rates which will also affect equity growth. Currently, it is possible to get a 1% lower rate on a 15 year mortgage than a 30 year mortgage.

Compare two alternatives of a 30-year and a 15-year mortgage. The payments will definitely be higher on the shorter term because it pays off quicker. However, if a person can afford the higher payments of $362.53 more per month in this example, the equity will be greater. Even after you take into consideration the higher payments, the increased equity is $17,236 at the end of the seven year holding period.

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Another decision that can affect equity build-up is making additional principal contributions along with the regular payments. Whether you’re making an occasional lump sum payment toward principal or regular monthly contributions, it will save interest, build equity and shorten the term on a fixed rate mortgage. Estimate your personal savings with this Equity Accelerator.

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Who is my agent?

September 17, 2013

Secret agent 150.jpgMore often than you’d expect, homeowners refer to the person they bought their insurance from as their agent. It sounds reasonable but it’s definitely not accurate. That person is the agent of the insurance company and they legally represent the company, not the customer. Even an independent agent who can place a policy with different companies is still an agent of the company.

A mortgage officer, in most cases is an employee and represents the company. And the same is true for a title or escrow officer. It’s important to understand the actual relationship to know what you can expect from them.

Any business person who wants to stay in business must treat their customers fairly and with a high degree of service. As a customer, you should be able to reasonably expect honesty and accountability. The difference is that employees owe their loyalty to their employer and agents owe their loyalty to their principal.

An agent owes more than just honesty and accountability. The principal can expect complete disclosure, obedience, loyalty, reasonable skill and care and confidentiality from their agent.

This advocacy is very beneficial during the buying or selling process to coordinate all aspects of the transaction. The agent can bring valuable experience to your side of the transaction to provide confidence that your best interests are being represented from start to finish.

Most states have a recognized procedure for the real estate professional to create a formal relationship between themselves and a buyer or seller. This requires a fiduciary/statutory responsibility that places the principals’ interests above the agent’s own personal interests.

Tried & True Paint Colors

September 13, 2013

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Copyright 2013 NATIONAL ASSOCIATION OF REALTORS®

Mortgage Interest Deduction

September 10, 2013

MID.pngOriginally, in 1913 with the Sixteenth Amendment, Income Tax allowed a deduction on any interest paid by a taxpayer. Prior to World War I, most interest was paid for business purposes and very little paid by individuals. Credit cards, revolving credit, student loans and home equity loans that would charge interest would not become popular for decades.

However, by the 1930’s, the Federal Housing Authority was created to help people to finance homes. Later, other quasi-governmental agencies like FNMA, FHLMC and GNMA were created to help facilitate mortgage lending.

Even though, Congress never intended to use this deduction to encourage homeownership, it has certainly benefitted millions of people who couldn’t pay cash for their home. This deduction has made owning a home more affordable for tens of millions of people.

The Tax Reform Act of 1986 eliminated the deduction of interest on most personal debt with the exception of qualified mortgage interest debt. Two new terms were introduced to specify what was qualified.

Acquisition Debt is the amount of debt incurred, up to a maximum of $1,000,000, to buy, build or improve a principal residence or second home. It must be a recorded lien and the amount cannot be increased by refinancing. In other words, the acquisition debt is a dynamic amount that decreases as the loan amortizes.

Home Equity Debt is any amount up to a total of $100,000 over Acquisition Debt. It must also be a recorded lien against either the first or second home. It can be used for any purpose and is no longer restricted to medical or educational purposes.

In the example below, a person borrowed money to buy a home and the entire first mortgage was acquisition debt. The unpaid balance was reduced by the payments made and the acquisition debt followed accordingly. At some point in the future, after the home had gone up in value considerably, the owner refinanced a much larger amount.

The existing acquisition debt was transferred into the new mortgage. Any borrowed funds that were used for capital improvements could be added to the existing acquisition basis. The interest on those funds would be deductible.

The owner/borrower could also deduct the interest on up to a maximum of $100,000 of home equity debt. If there was still debt above the acquisition and home equity debt, it would be classified as personal debt and the interest on it would not be deductible.

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Lenders are not concerned if they are making a tax deductible mortgage on a home. They want to make sure there is sufficient equity in the property to secure the mortgage should it have to be foreclosed. A homeowner should consult with their tax professional if there is a question about deducting the interest on their mortgage.

Click Here to use a Refinancing Analysis.

End of Summer

September 6, 2013

I’ll never forget this summer.  June 17th my dad had a stroke followed over the next couple of months with 2 other strokes and 2 surgical procedures.  He finally succumbed to his death on August 6th.  My dad was a kind and gentle man.  My parents were married 60.5 years.  We weren’t Leave It To Beaver, but we were and are a family of various degrees of personalities, interests, beliefs, humor and passions.  I had a modest childhood and don’t ever remember wanting for much that I wasn’t provided.  I grew up in a South Georgia town and have fond memories of a dad that drove a truck and worked very hard to provide for his family.  My mom and dad were united in discipline, values and morals.  We knew exactly what they expected of us.  We didn’t always make them proud with our decisions, but were respected and never turned away.  Ultimately as all of us have aged I see so much of my mom and dad’s personalities in each of us.  I look in the mirror sometimes or hear something come out of my mouth and have an instant “OMG”……. I am my parent!  Something everyone probably experiences at some point.

As I sit here today it is exactly 1 month since he passed.  My feelings are still raw with emotion when I think of him.  I think I’ve cried more in the past month that I have in decades.  I’m sure time will help me be able to cope as everyone has reassured me.  My brother-in-law emailed me last week and shared with me about his father that died 28 years ago.  He shared that there was hardly a day that his dad didn’t come across his mind and he uses those moments to strengthen and enjoy them as they are calming to him.  He used the acronyms WWDD and WDDS (What Would Dad Do and What Would Dad Say).  His email was a real comfort for me.

One thing about my father’s death that has reminded me an important lesson.  Tell those you love how much you love them more often.  Let hurt feelings go.  Draw closer to your family.  For those in your life that don’t reach out to you, let them be.  Concentrate on those that truly show that they care.  I was amazed by the number of people who sent me messages of comfort and condolences via phone calls, emails, cards, etc… that I rarely hear from, but are important to me as well as the hand full of those that I thought I was important to but didn’t get even as much as an email.  It’s reminded me to continue to be kind, be thoughtful, be caring and love anyway.

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The Rules

September 3, 2013

rules3.pngThe profit potential in single family homes for investment has been a consistently good long-term investment. They offer investors the opportunity of high loan-to-value mortgages at fixed interest rates for 30 years on appreciating assets, tax advantages and reasonable control that other investments don’t offer.

Last year, Warren Buffett said that if he had a way of buying a couple hundred thousand single-family homes, he would load up on them. Blackstone group L.P. (BX) has now purchased over 30,000 homes and American Homes 4 Rent (AMH) has more than 19,000 for rental purposes.

Individual investors actually have an advantage over the institutional investor but if they are not familiar with rental real estate, some basic rules could be very helpful.

  1. Invest now to get more in the future.
    Whether it is time, effort or money, the prudent investor is willing to forego immediate gratification for something more at a later date.
  2. Real estate is an IDEAL investment.
    IDEAL is an acronym that stands for income, depreciation, equity build-up, appreciation and leverage.
  3. Invest in single family homes in predominantly owner-occupied neighborhoods at or below average price range.
    This strategy should involve homes that will increase in value, rent well and appeal to an owner-occupant in the future who will pay a higher price than an investor.
  4. Location, location, location.
    The same homes in different areas will not behave the same. You can improve the condition, modify the terms or adjust the price but the location can’t be changed.
  5. Understand your strategy – buy and sell, buy and hold or buy, rent and hold.
    These three distinct strategies involve big differences in acquisition, management and taxation.
  6. Know where your profit is coming from before you invest.
    The four contributors to profit are cash flow, appreciation, amortization and tax savings. They don’t contribute equally or the same in all investments.
  7. Profit starts with purchase.
    Buying the property below market value builds profit into the investment initially.
  8. Risk is directly proportionate to the reward involved.
    An investment that has a high degree of upside also will have considerable downside possible.
  9. Avoid functional obsolescence unless you have a plan before you buy.
    The lack of usefulness or desirability of a home that exists when you buy it will still be there when you sell it. Unless it can be cured, it will affect future profit.
  10. Good property + good tenant + good management = great investment.
    These are three solid components for a successful investment.
  11. Problems left unresolved have a tendency to get worse.
    It is generally cheaper in time or money to fix a problem earlier rather than later.

If you’d like more information about the opportunities in our market, contact me.

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